INVESTORS may treat a company's financial statements as the gospel truth, but a new study shows that most asset values listed in them rely on estimation, which may have a significant impact on the bottom line if the estimates are off the mark.
About 82 per cent of the asset values in the balance sheets of Singapore-listed firms are based on estimates and these must be re-calculated in the next financial year, according to KPMG's study of 200 firms listed on the Singapore Exchange released on Monday.
A 1 per cent change in the total asset value of the firm can result in a change in net profit by as much as 38 per cent, according to the accounting and professional services giant.
Much of the estimation involves trying to update a firm's asset values from year to year. By contrast, only 10 per cent of its liabilities are based on estimates - most of the liabilities are carried "at cost" in the books, without yearly adjustments.
A company's assets include its property, plant and equipment. Estimates by its management may be needed to assess the assets' useful lives and residual values.
As for the investment properties in its books, the firm could be engaging external experts to estimate the value of these properties from year to year.
"Estimates are by their very nature subjective," said Mr Ong Pang Thye, head of audit at KPMG in Singapore. "They are underpinned by the nature and reliability of the information used to form these accounting estimates, which can vary widely."
The study showed that a significant proportion of total asset values in financial statements are based onjudgment calls. As such, they are susceptible to bias, errors and mis-statement.